Half-Point Rate Hikes in May and June? That’s What’s Priced In!

April 23, 2022

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8:23 pm

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28 comments

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Economics

CME Fedwatch rate hike probabilities based on traders’ positioning.

June Probabilities

July Probabilities

That 1.25 percentage points of rate hikes priced in for the next three months alone.

December Probabilities

Color me skeptical, but that has been the call of Jim Bianco for a while.

Market Not Setting Rates

If the Fed wants something else, it will walk back expectations.

Recall that 50% was a 90% chance for March. Until a parade of Fed presidents walked it back.

There is no market here. The Fed views communication as its primary tool. The market front runs communication.

Fed Uncertainty Principle and a Big Swift Kick in the Pants

On February 11, Bullard gave the market a kick, then in retrospect Powell didn’t like it.

For discussion, please The Fed Uncertainty Principle and a Big Swift Kick in the Pants

Now the Fed has indicated it wants to get to “neutral” by December or next March.

For now, the market agrees.

To bring down inflation, Chicago Fed President Charles Evans said the Fed might have to hike above neutral. Where is that?

For a discussion of “neutral” please see The Fed Searches For the Neutral Interest Rate, Where the Heck Is It?

Stock market carnage will be massive if the Fed gets to 2.75% to 3.25% by December. We would undoubtedly be in a huge recession if that happens.

I suspect a long pause after June, with recession anyway.

Regardless, Expect More Stock Market Pain Because It’s Coming

This post originated at MishTalk.Com.

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28 Comments

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dmartin

1 year ago

You know what wasn’t priced in? China’s zero covid policy and further lockdowns.

Bam_Man

1 year ago

“It’s hard to make predictions. Especially about the future.”

— Yogi Berra

RonJ

1 year ago

“Half-Point Rate Hikes in May and June? That’s What’s Priced In!”

The fine print should say, “subject to change without notice.”

Mish

1 year ago

Reply to RonJ

Absolutely

If the Fed wants something else, it will walk back expectations.

Recall that 50% was a 90% chance for March. Until a parade of Fed presidents walked it back.

honestcreditguy

1 year ago

the 10 yr front ran the rate hikes planned a lot…..expect confusion there and I dare say a little pullback

hmk

1 year ago

With the fed not buying bonds anymore, are the yields going to be unhinged from the fed funds rate? The 10Y has moved up a lot more percentage wise, so it appears the free market, not poisoned by the fed intervening, has bid up the yields on its own. My question is then, is there some kind of correlation between govt bond yields and the fed funds rate? I am thinking the free market will bid up yields to compensate for the fake deliberately understated CPI numbers in order to obtain a positive return. If the free market does that will the fed step in and start buying govt bonds again to bring down yields? The fed needs to stick to its only one mandate, lend against good capital in times of economic distress to stop a freeze in the credit markets. If they were prevented from financing govt debts I am thinking govts would live within their means. If they needed to raise taxes in order to finance the endless military interventions and govt largess to keep the peasants calm , citizens may take a closer look at what they are paying for. Then maybe there would be some electorate pushback to the worldwide destruction we have been causing. I am not sure if this reasoning is correct though. What would the alternative look like if the feds didn’t control interest rates?

Bam_Man

1 year ago

Reply to hmk

There is definitely a correlation between longer-term note/bond yields and Fed Funds. The note/bond yields reflect the “expected average” Fed Funds rate over that entire (5/10/30 year) time frame. If this were NOT the case, an arbitrage opportunity would then exist in the interest rate swap (fixed vs. variable) market.

Lisa_Hooker

1 year ago

Reply to hmk

The fed needs to stick to its only one mandate, lend against good
capital in times of economic distress to stop a freeze in the credit
markets.

Sheesh, that’s so 1913’ish.

Jackula

2 years ago

We are in for record inflation this summer, the FED is risking a crack up boom

Jojo

2 years ago

Reply to Jackula

Hope so! Will be a big SS increase then.

Lisa_Hooker

1 year ago

Reply to Jojo

Yup, SS increase will be 30% of your increased costs. If you’re lucky.

Jojo

1 year ago

Reply to Jackula

Yes, the High Inflation Rates Will Continue in 2022

James D. Gwartney & David Macpherson

– April 24, 2022

When do government spending and budget deficits cause inflation? Answer: When the government spending is financed by borrowing from the Federal Reserve. The Fed is the great money creator. When the Fed purchases assets, it does not have to check its bank account. It can merely write a check and thereby create money out of thin air. When a substantial share of government spending is financed by this method, the money supply will increase, and soon thereafter the inflation rate will rise. This linkage between rapid money growth and inflation is a basic law of economics, something like the law of gravity in physics.

This is precisely what has happened during the past two years. Regardless of supply chain challenges, monetary policy is primarily responsible for the current inflation. Between March 2020 and March 2021, Congress passed and the president signed three COVID-related bills totaling $5.5 trillion. These bills caused federal expenditures to increase from $4.8 trillion in 2019 to $6.8 trillion in 2020 and $7.0 trillion in 2021. This $4.2 trillion increase in federal spending over the two years was financed entirely by borrowing from the Fed. Fed holdings of financial assets, mostly Treasury bonds and mortgage-backed securities of federal housing authorities, increased from $4.2 trillion in February 2020 to $8.8 trillion in December 2021. Thus, the Fed has funded all of the increase in federal spending during the past two years, and even a little more.

During 2020, the M2 money supply, a broad measure of money flowing through the economy, increased by 25 percent. This expansion is far greater than both the annual money growth of 6 percent during 2010-2019 and the economy’s long-term annual real growth rate of 3 percent. Given this huge 2020 expansion in the money supply, forecasting the surge of inflation in 2021 was an easy call. In February of 2021, AIER published an article by one of the authors of this paper (Gwartney) “Yes, this time there will be inflation.” Of course, events confirmed the analysis of the article.

….

link to aier.org

Jojo

2 years ago

This will be more death by cuts. Powell should do 2.5%, then 1%, then evaluate.

Will be good to finally get some interest earnings on savings!

Nuddernoitall

2 years ago

Reply to Jojo

Of course the market would have a melt down with a James Bullard on steroids approach, but the better news would be, we would not have to listen to the kids in the back seat chanting “are we there yet … are we there yet … are we there yet?”

MPO45

2 years ago

I’ve been doing some deep contemplation and reflection on this post and if the ‘market’ is pricing in higher rates in the future why are we questioning that here? Isnt the free market what we all want to set rates? If that’s true then why is there outrageous indignation when the market narrative is something no one here wants to believe?

killben

2 years ago

Reply to MPO45

May be Mish is trying to say that the Fed getting to 2.75% to 3.25% by December is pure fantasy given what would happen to the stock market (and the probability of recession) before that.

But then – I feel it could happen because The Fed is in a box – inflation and credibility Vs stock market crash and recession. If inflation stays high and a deep recession (along with a stock market crash) is the cure to establish its credibility and get inflation down – poison pill may be but then when it is Hobson’s choice…

Mish

1 year ago

Reply to MPO45

Market NOT setting rates.

If the Fed wants something else, it will walk back expectations.

Recall that 50% was a 90% chance for March. Until a parade of Fed presidents walked it back.

There is no market here. The Fed views communication as its primary tool. The market front runs communication.

Fed Uncertainty principle yet again.

Bullard gave the market a kick, then in retrospect Powell didn’t like it.

link to mishtalk.com

MPO45

2 years ago

So if the Fed hikes the stock market crashes or does it crash regardless of whether the fed hikes or not because a “hard landing” is coming? If that is the case then what’s the point of anything at this point in time? It seems no matter what the fed does there is a hard landing, gloom and doom, financial Armageddon, cats and dogs living together, etc. No need to post anything else Mish, we’re done.

Congrats, we’ve reached a point of nothing matters because it’s all going to fall apart. I guess the only thing to do now is buy lots of puts on the market and profit handsomely. Alternatively, some will buy gold but I have very little interest in it.

JeffD

2 years ago

Still 7% below CPI after June’s hike. That’s all that matters.

goldguy

2 years ago

Rates are going far higher than most realize…

Stocks are going far lower than most realize…

Next week stocks will be a disaster…

Gold stocks will do well coming out of this mess the Fed has created…

MPO45

2 years ago

Reply to goldguy

“‘Gold stocks will do well coming out of this mess the Fed has created…”

What evidence exits to prove this point? If you compare the returns on the S&P 500 vs gold over the last 20, 50, 100 years then gold is a joke. But let’s assume gold suddenly goes from $2000/ounce to $100,000/ounce next month. What exactly do you do with your 1 oz coins next month? Do you sell them and buy a Ferrari? Do you convert them to dollars or bitcoin? Do you continue to hoard gold like a dragon?

If gold is worth 100k what is your new tax liability? Do you think governments will stand by and let you have all that extra free money? If gold holders are a tiny minority of people out there do you expect American citizens to rally around you and protect you when the government comes for your gold?

Do you truly believe that you will be a magician sitting atop of a hoard of gold and nothing bad will happen?

JRM

1 year ago

Reply to MPO45

It is clear you can’t read what you post “‘Gold stocks will do well coming out of this mess the Fed has created…!!!

There is a difference in “GOLD STOCKS” and “GOLD COINS AND BARS”!!!!!

MPO45

1 year ago

Reply to JRM

And what would drive the value of stocks up exactly? If the stock market crashes, it will take all stocks with it. Look at what happened on Mar 1, 2020 when covid panic hit. In case you need help, here is a chart of GDX – a gold ETF that holds many gold “stocks.”

link to finance.yahoo.com;.tsrc=fin-srch

If you love gold, keep buying it. I bought GDX during the 2008 panic and it has yet to recover to the price I paid for it. The only good thing is the dividend it paid. You can learn from my mistake or you can repeat it.

Scooot

1 year ago

Reply to MPO45

For info using your 2008 as a base, the physical Gold Price has risen from about $900 an ounce to around $1930 today, which is a compound annual return of about 5.5% over the 14 years. This comfortably kept pace with the CPI, which rose by a compound rate of about 2.1% over the same period. This is all you’d really hope for.

You should just view physical Gold as “cash” with intrinsic value, the hope being, it outperforms fiat currencies over the long run with regard to purchasing power, which it usually does. It’s not meant to match the returns you achieve from investing in “going concerns” such as equities.

The problem is that the Gold price is volatile, so buying and holding it over short periods is risky.

Lisa_Hooker

1 year ago

Reply to MPO45

I like the dragon idea.

Just watch out for hobbits and dwarves.

Six000mileyear

2 years ago

I took a look at interest rates on US bonds/Treasuries from overnight rates to 30 years. While most of the focus on this blog has been on yield inversion and its roadblock to the FED’s raising rates, I offer an observation that leads to the conclusion the FED is holding itself back from raising rates faster/higher. For all bonds/Treasuries with durations greater than 1 year, yields are ABOVE pre-COVID levels. The bond market did that. Short term treasuries are being more impacted by the FED since yields are still less than pre-COVID. Who benefits from lower short term interest rates? DEBTORS!!

Here is a possible scenario to consider. The US government won’t be able to repay long term debt in a rising interest rate by rolling over long term debt. Interest payments already consume a lot of the budget. If the FED can hold short term interest rates low enough for a long time, then the US gov’t can borrow short term and repay long term early. The US government then rolls over short term debt perpetually at low rates controlled by the FED. The unintended consequence is bank depositors will seek higher yields, depriving banks of capital for lending.

Bam_Man

1 year ago

Reply to Six000mileyear

Your last sentence is a false statement.

Banks do not lend their deposits. 95%+ of all Deposits are in fact created by lending.

Banks have not the slightest need for your deposits. If they did, they would not be offering you a real interest rate of -8.5% on them.

Banks have $TRILLIONS in Excess Reserves sitting at the Fed, which provides more than ample liquidity for inter-bank settlements – regardless of how much they have in deposits.

Nuddernoitall

2 years ago

A month ago, 2.75% is where I saw the Fed rate settle at end of this calendar year. Where I do not see clearly, is the market’s continual self flagellation when Powell or other fed members discuss raising rates. Increased rates are coming. Deal with it Mr. Market.

Half-Point Rate Hikes in May and June? That’s What’s Priced In!

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